IEM saw this coming

IEM saw this coming

IEM saw this coming

Romney most probable GOP nom on Iowa Electronic Markets since September

By: Tom Snee | 2012.04.10 | 04:09 pm

With Rick Santorum suspending his campaign Tuesday, Mitt Romney is now the all-but-official Republican nominee, an outcome the Iowa Electronic Markets saw as the most probable since Sept. 11, 2011.

On Sept. 10, Rick Perry was the market’s most probable nominee, with a contract price of 41.9 cents, which meant IEM traders believed there was a 41.9 percent probability he would win the GOP nomination. Romney was the second most likely nominee that day, at 40.5 cents.

But investors flipped positions Sept. 11 and Romney has been the IEM’s most likely candidate ever since. He crossed 50 cents for the first time on Sept. 30 and stayed there, except for a few days in December when he dipped as low as 48 cents during Newt Gingrich’s brief ascent in public opinion polls, including those in Iowa.

His price continued to rise past 80 cents through a hard-fought Iowa caucus campaign that was seen as a win at first (until the discovery of lost ballots several days later pushed him into second place behind Santorum) and then a big win in New Hampshire. The contract dropped in mid-January and mid-February after a handful of solid primary performances by Santorum and Gingrich in South Carolina and other Southern states. But the price of Romney’s contract never fell below 68 cents during either dip, as traders didn’t give much credence to either of their campaigns.

Tuesday morning, before the news broke that Santorum was suspending his campaign, Romney’s contracts were trading at 96.4 cents, while the price of the Rest of Field contract that represented Santorum’s candidacy had dropped to 1.5 cents. Within a half-hour of his announcement, the price had dropped to .5 cents.

With the GOP candidate now set, attention turns to the general election in November, where the Democratic contract was selling Tuesday afternoon for 60.5 cents, which means the market believes Barack Obama has a 60.5 percent probability of re-election. The GOP contract was selling for 39.9 cents.

A real money futures market operated by the University of Iowa Tippie College of Business, the IEM gives traders the opportunity to buy and sell contracts based on what they think the outcome of a future event will be. Contracts for the correct outcome pay off at $1; all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen. Traders can invest up to $500 in the market.